Returns Are Gaining Momentum At Solo Brands (NYSE:DTC)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Solo Brands (NYSE:DTC) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Solo Brands, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0051 = US$2.9m ÷ (US$642m - US$75m) (Based on the trailing twelve months to June 2024).
Therefore, Solo Brands has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Leisure industry average of 13%.
View our latest analysis for Solo Brands
In the above chart we have measured Solo Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Solo Brands for free.
So How Is Solo Brands' ROCE Trending?
Solo Brands has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 0.5% which is a sight for sore eyes. In addition to that, Solo Brands is employing 126% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Solo Brands has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
Long story short, we're delighted to see that Solo Brands' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 66% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Solo Brands does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.